Economics on Their Minds

Article excerpt


In the field of economics many flowers grow, some of which blossomed at the Jan. 4-6 annual meeting of the American Economic Association (AEA) in New Orleans. Hundreds of papers were presented on a wide variety of subjects. Here's a brief rundown on a few of the more eye-catching.

The Federal Reserve received considerable attention. Starting off with a blast, Christina Romer and David Romer of the University of California-Berkeley compared the economic forecasts of the policymaking Federal Open Market Committee (FOMC) with those of the Federal Reserve staff. Even though policymakers have the staff forecasts in hand when making their own projections, the study found that in predicting inflation and unemployment, the FOMC added nothing of value to the staff forecasts.

In the authors' words: "Someone wishing to predict actual inflation and unemployment who had access to the forecasts of both the FOMC and the staff would be well served by throwing away the FOMC forecast and just using the staff predictions. Policymakers appear to base at least some decisions on their apparently useless information."

Dean Croushore, University of Richmond economist and visiting scholar at the Federal Reserve Bank of Philadelphia, analyzed revisions in the core and overall personal consumption expenditures price indexes, inflation measures that directly influence monetary policy. He found a pattern that made it "possible to forecast revisions from the initial release to August of the following year. Generally, the initial release of inflation is too low and is likely to be revised up. Policymakers should account for this predictability." Some of the revisions "could have a substantial impact on monetary policy."

A paper by Jerry Tempelman, senior analyst with the Federal Reserve Bank of New York, was titled, "A case against explicit inflation targeting." It's well known that Fed Chairman Ben Bernanke favors such a policy, i.e., of the Fed announcing a numerical inflation target, and he has been pushing in that direction.

If anything, the presentation of the Tempelman paper testifies to the Fed's openness and willingness to allow its staff to speak out even though it could be interpreted as a shot at the boss.

Mr. Tempelman says: "Aiming for a specific number rather than a zone attributes too much ability to a central bank to fine-tune the economy. It also attributes too much precision to the measurement of the rate of inflation. .. [B]ecause the 1 to 2 percent long-run comfort zone of implicit inflation targeting is so universally understood to be the Federal Reserve's existing practice, it is not clear that anything is to be gained from an explicit announcement . …